Russia’s ruble has done something many people did not expect.

After the invasion of Ukraine, sanctions, the departure of foreign companies, exploding government spending, and growing trade problems were supposed to crush the currency. Instead, the ruble has remained surprisingly strong.

That strength is easy to misread. It can look like proof that sanctions failed and the Russian economy adapted. But the ruble is being supported by a very unusual set of conditions: weaker imports, restrictions on moving money abroad, continued export revenues, and a government determined to prevent another currency panic.

Those same forces are now creating problems of their own. A strong ruble hurts exporters, reduces the ruble value of oil revenues, and makes the Kremlin’s growing budget deficit harder to manage.

So the real question is no longer simply why the ruble did not collapse.

It is what Russia is paying to keep it strong — and what happens when that stability becomes increasingly expensive.

Today, I want to show you why the ruble survived, why that does not mean sanctions failed, and how Russia’s currency strength is becoming an economic trap of its own.

Here’s our roadmap:

Where Inflation Went — why official inflation can look manageable while everyday prices tell a harsher story.

The Hidden Price Rise — how sanctions, taxes, damaged infrastructure, and new trade routes make Russia more expensive.

Why Ruble Holds — the forces that keep demand for foreign currency unusually weak.

When Strength Hurts — why exporters and the state itself eventually start suffering from a strong currency.

The Budget Trap — what choices remain when weakening the ruble is dangerous, but defending stability becomes increasingly costly.

Where Inflation Went

The first strange thing about Russia’s economy is that inflation seems to be both everywhere and nowhere.

Officially, consumer prices in July were about six percent up year-on-year. That is unpleasant, but hardly a disaster.

Yet ask Russians how much more expensive their life feels, and you hear a very different story.

There is no mystery here. If you add Rosstat’s own annual inflation figures since the end of 2021, the cumulative increase approaches forty-six percent.

That is already substantial. Where a household once spent one hundred rubles, it would now need one hundred and forty-six.

And many Russians expect prices to rise even further. In July, people surveyed by the Central Bank expected prices to rise by almost 15% over the following 12 months. That’s more than twice the official inflation rate.

This gap is especially telling because in Russia, inflation carries unusual political weight.

For Russians of my generation, uncontrolled prices bring back the early post-Soviet years. Savings disappeared. Salaries could lose value between one payday and the next. The state looked powerless.

No Russian government wants to recreate that memory.

This is also why economic statistics deserve careful treatment. I would not simply tell you that Rosstat invents its inflation numbers. But there is a broader problem with information.

After the invasion, Russia stopped publishing parts of its foreign-trade statistics, officially to prevent “speculation.” Other economic information became harder to obtain. Independent institutions either disappeared or learned that there were limits to what could be said safely.

Recently, Andrei Klepach lost his position as chief economist at the state development bank VEB after his unusually critical assessment of Russia’s economic situation became public. He had warned that Russia was losing ground economically and technologically and that the war was creating dangerous strains.

That’s the Russian reality: telling your boss bad news can bury your career.

In theory, ordinary Russians could gauge the actual inflation from experience. But human memory isn’t that good at reconstructing prices. You might remember that butter seemed to cost less a few years ago, but not its exact price back then.

Foreign observers face the opposite problem. They cannot walk into Russian supermarkets every week, so they rely heavily on the surviving official data.

The Hidden Price Rise

Before 2022, Russia used to buy enormous amounts of machinery, components, chemicals, medicine, and consumer products directly from Europe.

Sanctions broke much of that system.

Now the same product may travel through a Chinese manufacturer, a distributor in Central Asia, another intermediary willing to accept sanctions risk, and finally a Russian importer. Every participant takes their cut, and the end customer pays a higher price.

Geography makes the problem worse. Russia’s population and industry sit mostly in its European half. A container arriving from China must travel enormous distances before reaching Moscow or St. Petersburg. The only viable mode of transportation is railways, which were already struggling with eastern bottlenecks, labor shortages, and aging equipment.

Then the government added another cost. At the beginning of this year, VAT went from twenty to twenty-two percent. Businesses can absorb some of a tax increase, but eventually, they will shift it to the customer – by raising prices.

And war has begun adding costs in a much more physical way.

This summer, Ukrainian strikes on Russian refineries produced fuel shortages across the country. Even Moscow stations imposed limits on gasoline sales. Russia responded by restricting fuel exports and bringing gasoline in from Belarus, Kazakhstan, and even India.

This imported gas costs more, and that cost does not remain at the gas station. Fuel moves economy, starting with its most basic level: agriculture. I have a dedicated video about how Russia’s fuel crisis is driving food prices up.

Another part of the problem is that Russia can no longer export grain by the usual Black Sea routes.

In the Rostov region, farmers expected a good harvest this year. Normally, that would be wonderful news. Instead, they faced expensive fuel and fewer buyers because attacks around the Sea of Azov disrupted grain exports.

This creates a bizarre split.

International wheat prices rise because buyers fear shortages from the Black Sea. But inside Russia, farmers struggle to sell their harvest because exporting that grain has become harder.

At first, this sounds like it should drive down food prices in Russia. If farmers have too much produce and too few buyers, the price they receive falls.

But consumers do not buy their groceries straight from the farmer. Between the field and the supermarket come storage, milling, trucking, packaging, fuel, wages, and retail. Most of those costs are rising. So cheap grain can coexist with expensive bread.

And there is a second effect. If farmers cannot cover their costs, they cut spending. They use less fertilizer, postpone replacing machinery, plant less, or leave the business altogether. That reduces production later.

So, the immediate effect is a lower price at the farm gate. But the longer-term effect is likely to be the opposite: weaker farms, disrupted supply, and eventually higher food prices.

Why Ruble Holds

Now we reach the heart of the mystery.

The ruble is not officially fixed. The Bank of Russia explicitly says it operates a floating exchange rate. The mechanism keeping the ruble strong is more complicated.

A currency rises when demand for it is strong relative to demand for foreign currencies. And Russia has changed both sides of that equation.

Start with imports.

An importer needs foreign currency to pay the foreign seller. When import demand is low, the economy needs less foreign currency. The Central Bank itself listed modest import demand as one factor supporting the ruble earlier this year.

Another part is what Russians can do with their savings.

Before the war, a wealthy Russian could move money relatively easily into European securities, foreign bank accounts, real estate, or other overseas assets.

Sanctions and Russian capital controls made the money much harder to move. And every ruble that cannot easily leave Russia is one ruble that is not being sold for euros, dollars, or another currency. That keeps down the demand for foreign currencies.

At the same time, Russian exporters bring foreign money in.

An oil company sells crude abroad. A fertilizer producer receives export revenue. A mining company gets paid by a foreign customer. When exporters sell part of those proceeds on the domestic market, they create demand for rubles.

There was another technical factor. For a period, Russia suspended foreign-currency purchases under its fiscal rule. That removed one more source of demand for foreign currency and gave the ruble additional support.

That is why the strong ruble can confuse outside observers. In a normal economy, a strong currency usually means that your economy is doing well and foreign investors want your assets.

But Russia has some very different forces at work. And once you understand them, the strong ruble stops looking “like nothing happened.” It starts looking like one of the consequences of what happened.

When Strength Hurts

A strong ruble can actually hurt Russia, because its economy still remains export-oriented, and a strong currency is bad for exporters.

Take a fertilizer producer.

The company sells much of its product abroad and receives foreign currency. But many of its expenses remain inside Russia: salaries, electricity, railway tariffs, maintenance, and taxes.

When the ruble strengthens, each dollar of foreign revenue converts into fewer rubles.

The company can try to raise its export price. But fertilizers trade on international markets. Buyers in Brazil or India do not care that a Russian company’s domestic costs have increased. They can bargain or buy somewhere else.

So the exporter gets squeezed from both directions.

This became serious enough that Alexander Vedyakhin, a senior executive at Sberbank, said in June that Russian exporters needed something closer to ninety rubles per dollar to feel comfortable.

By then, the Russian currency had appreciated by roughly fifty-five percent since the beginning of the previous year.

That is enormous for an export economy.

Industries with thin margins suffer first. Metals, forestry, coal, and other commodity businesses can produce plenty of output and still find that selling it abroad no longer produces enough ruble profit.

Investment is the next casualty.

A company facing uncertain export margins normally borrows money to modernize equipment, cut costs, or build something more productive.

But borrowing in Russia remains extremely expensive as the Central Bank keeps its interest rate at fourteen percent.

This problem reaches all the way to the Kremlin.

Russia sells much of its oil abroad for foreign currency. But the federal government pays soldiers, bureaucrats, contractors, pensioners, and domestic suppliers in rubles.

That makes the exchange rate part of the budget calculation.

At the beginning of this year, Russia’s oil-and-gas budget revenue fell to its lowest monthly level since the pandemic era. The Finance Ministry collected about 393 billion rubles from the sector in January, roughly half what it had collected a year earlier.

Lower oil prices were one reason, but the stronger currency was another.

This creates a political contradiction.

The Kremlin likes a strong ruble because it is something regular people appreciate. A plunging currency would make them panic. That already happened in the first weeks after the full-scale invasion when the ruble briefly dropped below one American cent. People rushed to exchange their savings for dollars, afraid that tomorrow the ruble might cost nothing at all.

But the government also needs exporters to produce taxable income. And for that, the ruble needs to be weaker.

There is a point at which a strong ruble stops being a free political victory and becomes something the state has to balance against the damage it causes.

Russia is approaching that point.

The Budget Trap

The ruble problem becomes much more dangerous when it meets the budget.

Russia entered this year with a planned federal deficit of about 3.8 trillion rubles, roughly $45 billion. By the end of July, the accumulated deficit had already reached almost 6.5 trillion rubles, or about $78 billion.

Part of this reflects the way Russian government spending is front-loaded early in the year. But the broader direction is clear: the state needs more money.

And unlike a normal large economy, Russia cannot simply turn to international capital markets and borrow cheaply from investors around the world. Moscow has to look inward.

This is where an uncomfortable question begins to appear: could the government eventually reach into private savings, or pressure Russians into financing government debt?

At the beginning of July, Russian households held more than seventy-six trillion rubles in bank deposits—the equivalent of more than $800 billion.

That is an enormous pool of domestic capital.

The government already plans to borrow about 5.5 trillion rubles domestically this year through federal bonds known as OFZs. Households are buying some of them voluntarily. In June alone, their holdings of government debt increased by sixty-two billion rubles.

But voluntary purchases have limits.

There are many steps the state can take before anything resembling outright confiscation. It can offer tax advantages for buying government bonds. It can change banking regulations. It can encourage state companies, pension funds, banks, and wealthy individuals to hold more government debt. And if the financial situation becomes serious enough, encouragement can slowly acquire a more administrative character.

The Russian banking system is concentrated enough, and politically dependent enough, that such pressure would be technically possible.

Politically, however, it would be dangerous.

A large share of Russians have little or no substantial savings. The people who do have significant money in the banking system are disproportionately drawn from groups the Kremlin does not want to antagonize: government officials, employees of state corporations, businesspeople tied to the state, and increasingly the families of soldiers and veterans who received unusually large wartime payments.

These are not natural enemies of Putin’s system. Many are among its beneficiaries.

That makes their money politically sensitive.

The deeper the state reaches into private wealth, the more likely it is to disturb the networks and social groups whose cooperation keeps the system functioning.

For now, the Kremlin is still maneuvering. Parliament has already approved legislation giving the government greater freedom to alter debt and spending plans without going through the usual public and parliamentary procedures.

So what happens next?

The most realistic scenario is not a dramatic seizure of bank accounts. It is a continued redistribution of pressure: more domestic borrowing, selective spending cuts, new taxes and fees, pressure on companies and banks, and a ruble allowed to weaken when necessary—but not so quickly that households begin to panic.

Each measure relieves pressure in one place while increasing it somewhere else.

That is the trap.

And this is why finance may ultimately become one of the weakest points of Putin’s political system.

The Kremlin can manipulate statistics, intimidate critics, conceal losses, and rewrite the public story of almost anything. Money is less forgiving. At some point, revenues have to cover expenditures. Somebody has to finance the deficit. Salaries have to be paid. Contracts have to be honored.

And Ukraine is making that arithmetic harder by attacking the physical infrastructure that generates and moves Russian wealth—oil refineries, storage facilities, pipelines, ports, and other parts of the energy economy.

A financial crisis by itself would not necessarily bring political change. Authoritarian governments can survive falling living standards for a surprisingly long time.

The more serious danger appears when financial weakness begins to affect the machinery of the state itself.

Russia’s administrative and coercive apparatus remains loyal to Moscow because Moscow can pay for that loyalty. Officials receive careers, status, access, protection, contracts, and money. Regional elites remain inside the system because cooperation with the Kremlin is still more profitable—and safer—than challenging it.

There are few people inside the system who are personally devoted to the creation of a totalitarian Russia as an ideological project. Most participate because the system rewards participation, punishes defection, and offers few attractive alternatives.

In that sense, much of Putin’s political machine consists of paid allies.

The dangerous moment for the Kremlin comes when it can no longer keep that bargain.

If Moscow begins struggling to finance the war, support the regions, reward the security services, subsidize strategic industries, protect connected businesses, and maintain the living standards of the groups on which the regime depends, loyalty becomes more expensive precisely when the state has less money with which to purchase it.

That is when a financial crisis can become a political crisis.

Powered by